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ERM at S. Claus, Inc.

During the summer months, the North Pole’s post office (Zip Code 00000) is usually a placid place. But when the calendar turns to October 1, the pace of activity quickens. Letters from boys and girls around the world start arriving in droves signifying the building excitement of the young customer base of the largest employer in the company town, S. Claus, Inc. Hundreds of letters a day arrive in October, thousands in November and millions during the second and third weeks in December and each one must be carefully sorted and checked twice by the audit and compliance department as part of an automatic appeal process.

Each letter contains lists chock full of special requests for the person who made the North Pole so famous: a certain Mr. S. Claus, chairman and CEO of S. Claus, Inc. Mr. Claus expects perfection so everyone working at the company is focused on the mission-critical fourth-quarter deadline. There can be no identification and delivery mistakes and no disappointed customers.

Achieving a goal of 100% perfection required that S. Claus, Inc. adopt and implement the enterprise risk management (ERM) process. Mr. Claus assumed the duties of chief risk officer and an ERM charter was drafted that set the tone at the top: there is no tolerance for risk. The S. Claus board-level risk committee, executive risk committee and internal audit group work together. S. Claus with the understanding that success results from embedding the ERM process into a carefully crafted strategic plan. Both the unacceptable downside of failure and the upside gain resulting from efforts to increase their customer base have been analyzed and incorporated into actionable items.

The ERM process recently paid off when an enterprise-wide risk identification and assessment noted that there could be some kinks in the supply chain. Supply chain risks are considered mission critical by Mr. Claus and always appear in the upper right red quadrant of a specially designed risk heat map. Amid rumors of a possible shut down of hundreds of local post offices around the United States, Mr. Claus had a private meeting with the U.S. Post Master General to discuss the problem. After the meeting, Mr. Claus determined that the issue was moving toward resolution and this particular supply chain risk could be re-plotted in the yellow segment of the heat map labeled “proceed, but with vigilance.”

One item on the risk map is of deepening concern, however, because it has been migrating from green to yellow to red far more frequently than ever before. It is a unique supply chain risk – the growing popularity of smartphones and tablets. Every time a new model is announced, usually in the third quarter, holiday demand escalates rapidly. The concern is that these high-tech gadgets are among the few items that are outsourced because the workforce of elves is busy making more traditional items (hula hoops are still big in some corners of the world). Nevertheless, quality must be maintained. The S. Claus brand name is considered priceless and cannot be put in jeopardy. So procedures have been put in place to ensure that these products meet the same standards as anything else that S. Claus, Inc. produces.

Another important risk management issue is the curious relationship between S. Claus, Inc. and the temporary “helpers” located around the world. The foreign exchange exposures are enormous. There has been a great deal of volatility this year, especially in Europe, and Mr. Claus has had to employ a hedging strategy to take advantage of any upside gain while also protecting the downside risk, since that is, in essence, risk management.